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How MLPs Fund their Growth

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MLPs rely on capital market

MLPs fund their growth by raising more capital every year, as they distribute major portions of their cash flow to unit holders. Over the past five years, MLPs have continued to raise more capital year-over-year. Distribution growth acts as a key driver of price appreciation and IDRs provide incentive for management teams to be more growth oriented.

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Various routes through which MLPs can raise money

A MLP can raise money through a variety of routes, including:

  • Debt: A MLP can raise money quickly through debt. A high interest rate environment is not very beneficial for raising debt, as it can hurt cash distribution.
  • Initial public offering (or IPO): A MLP can come up with the initial public offering and raise money through the equity market. Both GPs (general partners) and LPs (limited partners) can participate in the IPO.
  • Follow on public offer (or FPO): A MLP can issue a FPO to raise more money through the equity market by issuing more shares.
  • Private investments: A MLP seeking capital can bypass the market and issue shares directly to a private equity to fund a new project. Since 2004, MLPs have raised more than $15 billion through private investments in public equity.

Some of the MLPs that have raised money through private equity are Enbridge Energy Partners (EEP), Teekay Offshore Partners (TOO), ONEOK Partners (OKS), and NGL Energy Partners (NGL). These MLPs have a combined weight of 8.08% in the Alerian MLP ETF (AMLP).

In the next part of the series, we’ll discuss the distribution coverage ratio and its importance to MLPs.

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